Sterlite Industries (STLT)
Metals
Sterlite completes acquisition of Skorpion zinc mine. Sterlite completed acquisition
of Skorpion zinc mine in Namibia at a consideration of US$707 mn from Anglo
American plc. Sterlite expects to complete acquisition of remaining two zinc mines from
Anglo American by end-FY2011E. Acquisition of the entire portfolio of Anglo American
zinc mines will be EPS accretive though value accretion will be contingent on (1) longterm zinc price sustaining above US$1,900/ton and/or (2) significant accretion to
reserves.
Sterlite completes acquisition of Skorpion zinc mine; remaining two likely by end-FY2011E
Vedanta Resources had entered into a definitive agreement to acquire zinc assets of Anglo
American (Anglo) for a cash consideration of US$1.33 bn in May 2010. Vedanta stated at the time
of acquisition that (1) consummation of each of the three operational zinc assets in South Africa,
Namibia and Ireland would be done separately and (2) it would seek approval from HZ board and
Indian Government to complete acquisition through Hindustan Zinc (HZ), failing which the
acquisition will be done by Sterlite Industries.
Sterlite completed acquisition of Skorpion zinc mine in Namibia (after HZ failed to get approvals in
time) at a consideration US$707 mn (increase in consideration by US$9 mn since the initial
announcement is entirely attributable to accrued cash). Sterlite standalone entity can easily fund
the acquisition through its cash reserves of US$2 bn at end-Sep ’10. However, the acquisition of
Anglo zinc assets by Sterlite leads to inefficient capital and corporate structure.
Skorpion mine acquisition will be EPS accretive though value neutral
Skorpion mine has reserves of 911 kt of contained zinc metal, resources of 24 kt and annual
production of 150.4 kt of zinc at end-2009. Financials will be consolidated with retrospective
effect from Jan 1, 2010. Cost of production is at ~US$904/ton. We expect this acquisition to add
4.2% and 4.1% to our FY2012E and FY2013E EPS, at a zinc price of US$2,150 and US$2,250/ton.
We expect the acquisition to be value-neutral on disclosed reserves and long-term zinc price of
US$1,850/ ton. At the spot price of US$2,208/ ton, the acquisition will add Rs4 to our fair value.
Completion of remaining mines by end-FY11E and will entail further cash outflow of US$640 mn
Sterlite expects to complete acquisition of Lisheen mine in Ireland (935 kt of reserves and 102 kt of
resources) and Black Mountain mine in South Africa (480 kt of reserves and 378 kt of resources)
by end-FY2011E at a consideration of US$640 mn. Total consideration of all three mines stands at
US$1,347 bn, which Sterlite can easily fund through its cash reserves. Acquisition will add 8.3%
and 8.4% to our FY2012E and FY2013E EPS at zinc price of US$2,150/ton and US$2,250/ton,
respectively.
Acquisition of Anglo American zinc assets will make the company one of the largest zinclead producers in the world. Anglo American will add close to 400 ktpa of zinc-lead
production. The entire acquisition is value neutral; assuming mine life ends at the current
disclosed proven and probable reserves and assuming zinc prices of US$2,000, US$2,150
and US$2,250/ton for the next three years and long-term average of US$1,850/ton. The
entire acquisition becomes value accretive on (1) conversion of mineral resources of existing
mines to reserves and (2) option value of Gamsberg undeveloped mines. The conversion of
resources to reserves will add Rs10 to our fair value.
We compute value accretion of Rs7/share assuming long-term zinc prices stay at the current
level of US$2,208/ton. Anglo assets will likely generate EBITDA of US$310 mn in FY2012E at
the current zinc price; the acquisition consideration will appear inexpensive at 4.3X FY2012E
EBITDA.
Operating zinc assets are of high quality
Operating mines acquired/to be acquired from Anglo is of high quality; the cash costs of
these mines would in the 2
nd
quartile (range US$639/ton to US$1,018/ton). The three mines
acquired/to be acquired generated revenues of US$340 mn, EBITDA of US$171 mn and net
income of US$137 mn in 1HCY10 at an average LME zinc price of US$2,161/ton.
Details of mines acquired
` Integrated zinc mining and refining facilities named Skorpion in Namibia with annual
production capacity of 150 ktpa. The mine has reserves of 911 kt of contained zinc and
total resources of 24 kt at end-2009 with mine life of seven years. Vedanta has paid
US$707 mn for this mine. Cash cost of production in 1HCY10 was US$911/ton.
` Underground mine named Lisheen in Ireland with zinc and lead metal in concentrate
reserve of 935 kt (mine life of six years) and resources of 86 kt. Vedanta is expected to
pay US$308 mn for this mine. Cash cost of production in 1HCY10 was US$639/ton.
` 74% stake in Black Mountain mine in South Africa. Black Mountain is an underground
mine producing zinc (28.2 ktpa) and lead (49.1 ktpa) concentrate. Black Mountain mine
reported revenues, EBITDA and net income of US$54 mn, US$15 mn and US$11 mn in
CY2009.
In addition, Vedanta gets rights to the Gamsberg mine, one of the largest undeveloped zinc
deposits with potential resources of 186 mn tons. Vedanta indicates the potential to
produce 400 ktpa of zinc and lead. Vedanta has paid US$1.3 bn for these assets. Note that
the Gamsberg mine will ramp up to 400 ktpa of production only by 2018E. Press reports
indicate a capex of US$1.8 bn to ramp up the projected capacity.
